Income Tax Act, 1961 – Sections 143(1) and 148 – Reopening of assessment – Petitioner filed his return of income for Assessment Year 2015-16 – Assessing Officer processed return under Section 143(1) of the Act – Subsequently, AO reopened assessment vide notice issued under Section 148 of the Act – Respondent rejected objections of Petitioner against reopening of assessment – Whether notice issued by AO under Section 148 of the Act seeking to reopen assessment in relation to AY 2015-16 is sustainable – HELD – Completed assessment was sought to reopened by Respondent on ground that Petitioner had entered into a development agreement with land owners and received cash, but said cash component was unreported in tax return for AY 2015-16 – Transfer had not taken place in year of receipt – When sale deed was executed in subsequent year, transfer took place at that point of time – Assessee had offered amount of capital gains to tax in next corresponding assessment year, that is, 2016-17 – Opinion formed by AO that he had reasons to believe about escapement of income in Assessment Year 2015-16 was misconceived and without foundation of facts and without foundation in law – Notice issued by Respondent under Section 148 of the Act set aside – Petition is allowed

 

2022-VIL-260-GUJ-DT

 

IN THE HIGH COURT OF GUJARAT AT AHMEDABAD

 

R/SPECIAL CIVIL APPLICATION NO. 3406 of 2022

 

Date: 25.11.2022

 

CHHAGANLAL MULJI DHOLU

 

Vs

 

JOINT COMMISSIONER OF INCOME TAX, JCIT (OSD) CIRCLE

 

For the Petitioner(s) No. 1: MR SN DIVATIA (1378)

For the Respondent(s) No. 1: MRS KALPANAK RAVAL (1046)

 

CORAM

HONOURABLE MR. JUSTICE N.V.ANJARIA

HONOURABLE MR. JUSTICE BHARGAV D. KARIA

 

CAV JUDGMENT

 

(PER: HONOURABLE MR. JUSTICE N.V.ANJARIA)

 

Heard learned advocate Mr. S.N. Divetia for the petitioner and learned advocate Mr. Nikunt Raval for the respondents at length.

 

2. Filed under Article 226 of the Constitution, in this Special Civil Application, the challenge is directed against notice dated 31.03.2021 issued by the respondent assessing officer to the petitioner under Section 148 of the Income Tax Act, seeking to reopen the assessment in relation to assessment year 2015-16.

 

2.1 The assessing officer stated that he had reasons to believe that the income in the hands of the petitioner assessee, for the year under consideration, had escaped assessment within the meaning of section 147 of the Income Tax Act, 1961 (hereinafter referred to as the "Act").

 

2.2 Also prayed is to set aside the order dated 08.12.2021 whereby the respondent rejected the objections of the petitioner against reopening of the assessment.

 

3. Stating the attendant facts, the petitioner is an individual who is stated to be deriving income from the property and other sources. He filed his return of income for the assessment year 2015-16 on 31.12.2015 declaring the total income of Rs. 23,71,220/-. The return was processed under section 143(1) of the Act.

 

3.1 Notice under Section 148 of the Act came to be issued to the petitioner on 31.03.2021 whereby the assessing officer proposed to reassess the income. In response to the said notice, the petitioner filed return of income on 27.05.2021 declaring total income as above. The reasons for reopening the assessment were furnished to the petitioner on 14.07.2021. The petitioner filed his objections on 15.06.2021, which were uploaded on 30.09.2021. On 08.12.2021, the petitioner received notice under section 142(1) of the Act wherein the rejection of the objections came to be incorporated.

 

3.2 The completed assessment was sought to reopened by the respondent on the ground that the petitioner had entered into a development agreement with land owners of one Gokulesh Infra. In the said transaction, the petitioner was paid Rs.43,54,876/- in cash and Rs.44,16,000/- by cheque.

 

3.3 It was stated that the cash component was unreported in tax return for the assessment year 2015-16. The development agreement, without transfer of ownership rights, stated the petitioner, was executed in the financial year 2014-15 and part payment was received by the petitioner, however, full and final payment against was received in the subsequent year, that is, financial year 2015-16.

 

3.4 The petitioner filed return of income for next assessment year 2016-17 on 30.11.2016 declaring total income of Rs. 2,79,00,570/- including long time capital gain arising out of the said land transaction. The scrutiny assessment was completed under section 143(3) on 10.12.2018.

 

3.5 Now the reasons for reopening the case of the petitioner on 14.07.2021 may be extracted in its relevant part,

 

"2. Brief details of information collected/received by the AO:

 

The undersigned is in receipt of information from Jt. CIT (OSD), Central Circle-2, Baroda. The information pertains to a search assessment proceedings which was carried out on Akshar Group cases, Shri Mehul Patel and Shri Rakesh Patel which revealed that many seized documents pertain to Shri Chhaganlal Murji Dholu, who as per documents seized is among six land owners who have paid cash on-money to the firm GOKULESH INFRA. There is a development agreement between the land owners and Gokulesh Infra firm.

 

3. Analysis of the information collected/received:

 

The information contains evidence of the purchase/sale of the property at Revenue Survey No. 28, 29, 31, 32, Gokulesh City Project, Dabhoi Road, Baroda in the form of Sale Deed. As there is a development agreement between Sh. Chaganlal Murji Dholu (one of the land owners) and Gokulesh Infra, Sh. Chaganlal Murji Dholu has received unaccounted cahs amounting to Rs.43,54,876/- and received cheque payments on multiple occasions totaling Rs.44,16,000/-. It is mentionable that the assessee has been paid a total of Rs. 87,70,876/- from Gokulesh Infra for his land equaling 9.58% of the total land meant for the project as per the analysis of the information received. The case component of the property transaction is unreported and needs to be brought to tax.

 

3.5.1 The Assessing Officer recorded,

 

"it is evident that the assessee has sold immovable property and received a total cash component of Rs.87,70,876/- by the Gokulesh Infra, the same is liable to be brought to tax. ... On perusal of return filed by the assessee, it is seen that the assessee has not disclosed the same in his return. Therefore, it is aptly clear that the assessee has not disclosed the entire transaction in his Return of income filed for the A.Y. 2015-16 and has also not offered the same for taxation."

 

3.5.2 It was further stated that in view of the above facts, the assessing officer had reasons to believe that Rs. 87,70,876/- was the escapement of income within the meaning of Section 147 of the Act and that there was failure on the part of the assessee to disclose all material facts fully and truly, which made the case fit to issue notice under section 148 of the Act.

 

3.6 In the objections filed by the petitioner, it was submitted that no capital gain had escaped tax, and that the information that Rs. 43,54,876/- was received in cash was erroneous and no cash had changed hands in the transaction in question. The assessee stated that the transaction was not that of sale, but it was in the nature of development agreement. It was submitted that the date of transaction would determine the liability of tax on the gains.

 

3.6.1 It was next submitted that when the transaction was in the nature of development agreement, in such situation, the gain was not required to be offered to tax in the assessment year 2015-16 and that the gain arising out of the transaction was offered as tax as capital gain in the assessment year 2016-17. Since the transaction was of development agreement, the property would pass on a future date upon fulfillment of all obligations agreed upon between the parties, it was sought to be pointed out. It was then contended that for the purpose of classification of stamp duty also, the agreement was classified as development agreement.

 

3.6.2 Thus the crux of the objections of the assessee to the proposed reopening was that firstly the transaction was not of the sale, but was an agreement for development. Secondly, the transfer did not take place in the previous year corresponding to the assessment year 2015-16, but the transfer took place during previous year 2015-16, that is, relevant to assessment year 2016-17. Thirdly, it was the case that the gain arising out of the transaction was offered to tax for the assessment year 2016-17 and that no tax had thus escaped assessment.

 

4. Learned advocate for the petitioner assailing notice under section 148 of the Act as well as the reasons recorded for the purpose, submitted that assertion by the respondent that the petitioner paid cash on money to firm Gokulesh Infra was factually incorrect inasmuch as no such money was paid. The petitioner was one of the co-owners who had entered into development agreement with the said firm, it was submitted.

 

4.1 Referring to paragraph 3 of the reasons recorded in which the respondent had asserted that there was evidence in form of sale deed, it was submitted that no such sale deed was executed, but there was a development agreement. It was then submitted that the figures in para 3 of the reasons recorded were at discrepancy and there was apparent contradiction in the quantum of escaping income. It was submitted that similarly, the amounts were not correctly mentioned regarding total cash component in para 5 of the reasons recorded.

 

4.1.1 Learned advocate for the petitioner in support of his submission relied on the decision of this Court in Varshaben S. Patel vs. ITO [281 ITR 75) (Guj)] to submit that no material was produced on the basis of which it could be concluded that the property transaction was unreported and was not brought to tax, which may justify the invocation of section 147 of the Act. Next relied on was the decision of the Bombay High Court in Gateway Leasing P. Ltd. Vs. Assistant Commissioner of Income Tax [(2020 117 Taxmann.com 442 (Bom)] to submit that the respondent officer could not have acted on the borrowed belief of the other investigation wings without verifying the facts on record. The decision of the Delhi High Court in Pr. CIT v. Meenakshi Overseas (P) Ltd[(2017) 395 ITR 677 (Delhi] was pressed into service to submit that crucial link between the information made available to the assessing officer and the formation of objective belief was missing in the case.

 

4.2 On the other hand, learned advocate for the respondent relied on the contents of and contentions canvassed in the affidavit-in-reply. Re-asserting the facts involved, it was stated that the petitioner showed the total long term capital gain amounting to Rs. 2,44,96,623/- including long term capital gain of Rs.78,07,307/- arising from the sale transaction with Gokulesh Infra while filing return of income for the assessment year 2016-17. Subsequently, the scrutiny under Section 143(3) of the Act was completed and that the ledger of the payments received from Gokulesh Infra in the books of the petitioner, an amount of Rs.43,57,876/- was found to have been received but not reported in the ledger of Gokulesh Infra, submitted the petitioner. It was submitted that there was tangible information available with the assessment officer, showing escapement of income. It was submitted that the original income was processed under section 143(1) of the Act only. It was submitted that the cash income discovered had not been reflected in the original return filed.

 

4.2.1 Learned advocate for the respondent submitted that although same transaction was of the assessment year 2016-17, receipt of cash, as per the information available was relatable to assessment year 2015-16, therefore, reopening was acted upon for the said year and the cash receipt was shown as per the information available. Learned advocate for the respondent submitted that there was sufficient prima facie material available with the Assessing Officer to exercise the powers for re-assessment.

 

4.2.2 Learned advocate for the respondent further inferred his submissions by placing reliance into decision of this court in Heval Navinbhai Patel v. Income Tax Officer, Ward 3(2) (2) [(2021) 126 taxmnn.com 82 (Guj)], in which case the individual assessee had sold land for consideration of Rs.5.38 crores and had not filed return of income during the year, a search under section 132 was conducted upon the particular group to which the assessee had sold the land. During search, documents were seized, which revealed that the assessee had actually received Rs. 9.07 crores though the sale deed mentioned the sale consideration of Rs. 5.38 crores. The reopening notice by the assessing officer on the basis of such facts was held to be justified.

 

4.2.3 Another decision also of this Court in Kiran Ravjibhai Vasani vs. Assistant Commissioner of Income Tax [(2018) 94 taxmann.com 354 (Guj)] was also relied on, wherein the facts were similar. The assessee had purchased lands for which a part of consideration was in cash, which was not disclosed in books of account, the assessee failed to rebut evidence such as cash vouchers, summary of sale deed, etc. and in such facts and circumstances, the Court held that the case for reopening for the assessment was clearly made out.

 

4.2.4 Yet another decision of the Delhi High Court in Jatinder Pal Singh v. Deputy Commissioner of Income Tax, Central Circle-9 [(2021) 128 Taxmann. 414 (Delhi) was referred to in which the assessing officer was held to be justified in making addition under Section 69A in respect to cash which was received by the assessee, which as per his case, was advanced for sale of agricultural land from the buyer through the broker. The said aspect was revealed in course of search of the premises of the assessee.

 

5. Having considered the facts involved and the contentions canvassed, it has to be observed that in response to the notice dated 06.08.2018, issued by the assessing officer under section 142(1) of the Act for Assessment Year 2016-17, the petitioner assessee submitted its response dated 09.08.2018, copy of which was produced by the learned advocate for the petitioner in the course of hearing, which was taken on record. Therein, it was pointed out to the competent authority that the petitioner had offered long term capital gain, total Rs. 78,07,307/-. The same was in respect of the land covered in the very transaction in question, being land at Joban Tekri, Plot No. 28,29,31,32, which was jointly owned by the assessee and others and the share of the assessee was 9.58%.

 

5.1 It was stated that out of the said property, 45.36% was sold during the year under consideration, details thereof were given as under,

 

Particulars			Amount
Total Purchase Cost of said Property			(A) Rs.54021895/-
Cost of Acquisition of the assessee
share 9.58%			(B) Rs. 5175298/-
Total Sale consideration of 45.36%
sale of said property is			(C) Rs.115240083/-
Share of sale consideration @ 9.58% is			(D) Rs.11040000/-
Cost of acquisition of property
sold 45.36% of (B)			(E) Rs. 2347515/
Gain to the assessee is			(D) - (E) Rs. 8692485/-
Indexed Cost of Acquisition
=2347515*1081/785-3232693			(F) Rs. 3232693/-
Capital gain to the assessee is (D) - (F) = 11040000-3232693 = Rs. 7807307/-

 

 

5.1.1 Similarly, the details of other property being land at Khatamba, in which the assessee had 30% share was also produced and the capital gain was shown, however, the details thereof is not required to be mentioned here as the same was not subject matter of the grounds mentioned as reasons for reopening. What is to be noticed that it was demonstrated was that the capital gain to the tune of Rs.78,07,307/- was shown and offered to tax by the assessee in the next assessment year 2016-17.

 

5.2 Given the above undisputed submission of fact, the clear case of the assessee stands to suggest that the transfer of land took place during the subsequent year, that is, 2016-17, since the transaction was in nature of development agreement. It was only when all the obligations of the parties were fulfilled under the development agreement, the transfer in eye of law would take place. The gain arising out of the transfer in the year concerned, that is, assessment year 2016-17, was offered to tax. There was no escapement of income not charged to tax.

 

5.3 The Assessing Officer has to form a reasonable belief that the income of the assessee in the year under consideration has escaped assessment. In the present case, the reasons recorded by the assessing officer show that the alleged escapement of income in cash component of the transaction in relation to development agreement was in the assessment year 2015-16. Now the income under the head "capital gains is liable to be computed in accordance with the provisions of section 45(7) of the Act. Section 45 of the Act mentions about "Capital Gain" that any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in ......, be chargeable to income-tax under the head "Capital gains", and shall be deemed to be the income of the previous year in which the transfer took place.

 

5.4 Reverting to the basic facts in this case, though the allegation is that the cash payment was made and it escaped the tax, it was pursuant to a development agreement. Furthermore, there is no tangible material on record to even prima facie show that assessee has received cash from M/s. Gokulesh Infra for sale of the property at Revenue Survey No. 28, 29, 31, 32, Gokulesh City Project, Dabhoi Road, Baroda. The sale deed was executed during the financial year 2015-16, which was relevant to assessment year 2016-17. The transfer could not be said to have taken place for the purpose of charging income under capital gain during the assessment year 2015-16. The tax would be leviable in the corresponding assessment year, that is, 2016-17. There is no gainsaying that the capital gain of this transaction was brought to tax by taking up income tax returns for limited scrutiny under section 143(3) on 10.12.2018 in Assessment Year 2016-17 as the assessee had offered capital gain chargeable to tax for the said assessment year.

 

5.5 The decision of the Supreme Court in Commissioner of Income Tax vs. Balbir Singh Maini [(2018) 12 SCC 354] would bring home the point. The question before the Apex Court was about when the transfer could be said to have effect under section 2(47) (v) of the Income Tax Act when a joint development agreement was executed. The Supreme Court considered the definition of transfer under section 2(47)(v) of the Income Tax Act read with Section 53A of the Transfer of Property Act, which provision deal with the doctrine of part performance. The development agreement in that case was not registered agreement.

 

5.5.1 It was held that even though the license was given thereunder, for the purpose of developing the land into flats and to sell the same under the said development agreement, it does not amount, in eye of law, to "transfer" under section 2(47)(v) of the Income Tax Act. It was held that license cannot be said to be in possession of the property within the meaning of section 53A of the Transfer of Property Act.

 

5.5.2 The Supreme Court observed,

 

"22. The object of Section 2(47) (vi) appears to be to bring within the tax net a de facto transfer of any immovable property. The expression “enabling the enjoyment of” takes color from the earlier expression “transferring”, so that it is clear that any transaction which enables the enjoyment of immovable property must be enjoyment as a purported owner thereof. The idea is to bring within the tax net, transactions, where, though title may not be transferred in law, there is, in substance, a transfer of title in fact."

 

(Para 22)

 

5.5.3 It was observed that under the joint development agreement in question, the owner continued to be owner throughout the agreement and at no stage, the transfer rights were travelled to the other side. The transfer would take place only when the sale deed was executed. The Supreme Court in Balbir Singh Maini (supra) also highlighted the principle that income tax cannot be levied on a hypothetical income.

 

5.6 In the present case, it happened in the subsequent income year and the capital gain thereof was offered to tax in the corresponding assessment year. The basic conception is that there must have been an acquired right to receive income to make it chargeable to tax. It may be that income may accrue to an assessee without actual receipt of the same and if the assessee has acquired right to receive the income, it can be said to have been accrued to him. On the other hand, in order to attract liability to tax, there must be accrual of income in law.

 

5.7 The decision in CIT vs. Shoorji Vallabhdas and Co. [(1962 46 ITR 144 (SC)] was referred to by the Supreme Court in Balbir Singh Maini (supra) to observe,

 

"Income tax is a levy on income. No doubt, the Income Tax Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt; but the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in bookkeeping, an entry is made about a ‘hypothetical income’, which does not materialise. Where income has, in fact, been received and is subsequently given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the books of account.”

 

5.8 The Supreme Court in Uttar Pradesh v. Aryaverth Chawal Udhyog [(2015) 17 SCC 324] observed that the material on which the assessing authority based its opinion must not be arbitrary, irrational or irrelevant but must bring home the appropriate rationale of action taken. It was held that without proper material relied on, the "reason to believe" would become arbitrary and bad in law.

 

5.9 Similar was held by the Supreme Court in Ganga Saran and Sons (P.) Ltd. v. ITO [130 ITR 1],

 

"It is well settled as a result of several decisions of this Court that two distinct conditions must be satisfied before the Income Tax Officer can assume jurisdiction to issue notice under section 147 (a). First, he must have reason to believe that the income of the assessee has escaped assessment and secondly, he must have reason to believe that such escapement is by reason of the omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment. If either of these conditions is not fulfilled, the notice issued by the Income Tax Officer would be without jurisdiction. The important words under section 147(a) are "has reason to believe" and these words are stronger than the words "is satisfied". The belief entertained by the Income Tax Officer must not be arbitrary or irrational. It must be reasonable or in other words it must be based on reasons which are relevant and material. The Court, of course, cannot investigate into the adequacy or sufficiency of the reasons which have weighed with the Income Tax Officer in coming to the belief, but the Court can certainly examine whether the reasons are relevant.....

 

(para 6)

 

5.9.1 The Supreme Court further stated,

 

"It there is no rational and intelligible nexus between the reasons and the belief, so that, on such reasons, no one properly instructed on facts and law could reasonably entertain the belief, the conclusion would be inescapable that the Income Tax Officer could not have reason to believe that any part of the income of the assessee had escaped assessment and such escapement was by reason of the omission or failure on the part of the assessee to disclose fully and truly all material facts and the notice issued by him would be liable to he struck down as invalid."

 

6. When the amount received by the petitioner assessee by way of cash was pursuant to development agreement and the transfer had not taken place in the year of receipt, when the sale deed was executed in the subsequent year, the transfer took place at that point of time. The assessee had offered the amount of capital gains to tax in the next corresponding assessment year, that is, 2016-17.

 

6.1 The income by way of capital gain is chargeable in the year of capital assessment even though the consideration may be realised earlier or later or or there may not be realisation at all. In the present case, as explained above, the execution of development agreement with Gokulesh Infra did not give rise to transfer within the meaning of section 2(47)(v) of the Act in the year 2014-15. Therefore, the entire basis of reopening was erroneous of facts and misconceived in law. In such working of facts, the opinion formed by the assessing that he had reasons to believe about escapement of income in the assessment year 2015-16 was misconceived and without foundation of facts and without foundation in law.

 

7. In the above view, the present petition deserves to be allowed. Notice dated 31.03.2021 issued by the respondent under section 148 of the Act, is set aside. Also set aside is the order dated 08.12.2021, whereby the respondent rejected the objections of the petitioner. Rule is made absolute accordingly.

 

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